A recent state court decision in California could prove a major headache for online retailers that engage in comparative price advertising. Although the decision — People of the State of California v. Overstock.com — is not binding precedent and its future on appeal is far from clear, the decision suggests that retailers may be forced to adopt more rigorous internal standards when engaging in comparative price advertising.

In 2010, a coalition of California District Attorneys sued the online retailer Overstock.com (Overstock), alleging that Overstock’s online price comparisons were untrue and misleading and therefore violated California’s consumer protection laws. Specifically, the suit targeted Overstock’s practice of comparing the prices of its products, labeled as “Today’s Price,” with the prices supposedly charged by other merchants, which it labeled as the “Compare At Price.” In order to establish the “Compare At Price,” Overstock claimed that it finds at least one example of another retailer selling at that price and that, on average, Overstock’s prices are 33 percent below its competitors. According to the Complaint, however, the “Compare At Price” did not actually reflect the prevailing market price for products and it artificially inflated the discounts that Overstock claimed to be offering consumers.

In a decision from Superior Court Judge Wynne Carvill, the Court agreed that Overstock’s price comparisons misled consumers. Rejecting Overstock’s current method of establishing price comparisons, the decision directs Overstock to calculate price comparisons according to one of three methods:

  1. By using a range of prices that reflects the range that is, in fact, identified by the company when comparing prices;
  2. By using the price from one of the five largest Internet shopping sites, as determined by a third party source, or an average of the prices on such sites; or
  3. By using the price from one of the three largest shopping sites for the category of product being sold (e.g., furniture, jewelry, etc.) as identified by a third party source.

Notably, however, the Court states that these are not the exclusive methods of calculating price comparisons, but rather offered for the purposes of establishing a safe harbor. The Court also levied a civil penalty of nearly $7 million.

Perhaps unsurprisingly, Overstock was highly critical of the decision, claiming that the ruling “goes so far it harms the marketplace.” It also claimed in a post-decision press release that it is the “gold standard in retail price comparisons” and that it verifies each comparison price it uses and thoroughly discloses the manner in which it does so. Overstock also announced that it will appeal.

Despite being a non-binding state court decision, this case raises important issues regarding how online retailers can engage in comparative price advertising while managing their liability exposure. As the case works its way through the California state court system, retailers should be sure that they have a clear system in place for establishing comparative prices.